Considering a Short Sale? Don’t Wait
Over the past several years many Phoenix homeowners have used the short sale as a solution to sell a home they are upside down in. The short sale is considered by many to be the best and most responsible option for homeowners that owe more than their home is worth. Banks have realized that a short sale is much more cost effective for them as compared to a foreclosure. The bank ends up netting more money than if they foreclosed on the house. It does less damage to the homeowner’s credit and allows them to buy a home again in a relatively short period of time verses a foreclosure.
In a short sale, the homeowner is required to supply their lender with financial information and a letter describing their hardship. The house is listed on the market for sale and when an acceptable offer is received the offer, along with the financials and hardship letter are submitted to the seller’s lender. The lender will respond with a letter that defines the terms of the acceptance. Arizona is a non-deficiency state and the deficiency, or the amount the bank is paid short of what is owed, is generally not something the bank can go after at a later date in many cases. If the homeowner is subject to the bank being able to go after the deficiency, it can sometimes be forgiven in a short sale. It is important to consult a lawyer to be advised on each individual potential exposure.
A homeowner can have exposure to consequences in two ways in a short sale. Since Arizona is a non-deficiency state in many cases the lender cannot go after the homeowner for the amount of the delinquency. The second exposure is tax liability; the lender is required to report the amount of cancelled debt to the IRS on a form 1099A on a foreclosure and a 1099C on a short sale. In both cases the homeowner could be liable to pay income taxes on the amount of the shortage. Because of the Mortgage Debt Relief Act of 2007 you may not be required to pay taxes on the income shown on the 1099, it is again important to get legal advice on each situation.
If a short sale is something that has been or is being considered, it is a very critical time to consider doing one now. The Mortgage Debt Relief Act of 2007 expires and the end of 2012. A short sale takes typically a minimum of 90 to 100 days to get approved. Now is a critical time to get your home listed if you are considering a short sale in order to take advantage of the Mortgage Debt Relief Act. In our market, the amount of the deficiency can be substantial and add up to a chunk of money being owed to the IRS. Having a foreclosure exposes a homeowner to the same tax exposure as a short sale when this Debt Relief Act expires.
In the current market, a typical example is a family that owes $200,000 on a home that is now worth $100,000. This would create a deficiency of $100,000, the amount that will be reported on the 1099C or the 1099A. This $100,000 could be considered additional income received and taxed as income. Depending on the owners tax bracket this adds up to a considerable amount.
There is talk as to whether the Tax Relief Act will be extended or not. Many believe that because it is an election year the act will be extended, however I have listened to experts debate this and there are great arguments that the forgiveness act will not be extended. The other side believes that when the lawmakers see the amount of lost revenue that is being forgiven–believed to be in the trillions– they will think differently and want to collect it. Either way, if a short sale is something you are considering it is definitely important it to check into in now.
In most cases a short sale is the best way to sell a home that is under water. It is best for the banks and does the least amount of damage to the homeowner’s credit and in most cases has the least amount of tax consequences. We know that the tax consequences may be forgiven if the home is closed before the end of this year. It is not known if the Tax Relief Act will be extended past 2012. Given that it takes a minimum of 120 days to close a short sale now is the time to act. If a home is listed April 1 it is likely to not close escrow until August 1 at best. It is common that by the time a short sale is approved the buyer may no longer be interested and the process has to begin again. It is also common in today’s market that the appraisal comes in lower that the approved price and this tacks 30 to 40 days on to the process.
The short sale is very common in our market because of the severe decline in real estate values. If it is something you are considering, now is the time to look into whether it is the best option for getting out from underwater and short selling your home.